Tax Type
Retail Sales and Use Tax
Description
Deficiency assessments, inhouse advertising department
Topic
Collection of Delinquent Tax
Date Issued
03-25-1999
March 25, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This responds to your letter requesting reconsideration of my prior determination to ***** (the Taxpayer) as a result of a sales and use tax audit for the period January 1992 through November 1995. I apologize for the delay in responding to your letter.
FACTS
As a national chain of restaurants with operations in Virginia, the Taxpayer allocates advertising expenses to each location. According to the Taxpayer, its inhouse advertising department is strictly administrative as all design, production, concept, photography, etc., are provided by advertising agencies.
The only issue under reconsideration is the tax assessed on "advertising contribution' fees. In the prior determination, these fees were held taxable. However, the Taxpayer maintains that these fees are clearly not all taxable and that only 42.7337% of these fees should be held taxable.
In addition, the Taxpayer claims that its advertising department may have already paid sales tax on the purchases associated with the taxable portion of these fees. The Taxpayer indicates that its records on this matter are available for inspection and that it has unsuccessfully attempted to resolve the taxability of these charges with the department's audit staff.
DETERMINATION
In the initial determination, I concluded that there was no basis to entirely or partially exempt the fees at issue since such fees appeared to consist only of taxable expenses. From a careful review by my audit and policy staffs of the new information presented, I continue to find insufficient basis to revise the assessments as requested.
It appears to be your position that the "advertising contribution' fees included in the audit represent a charge for all advertising and related expenses incurred by the Taxpayer but passed on to all of its stores. However, according to the Taxpayer's chart of accounts dated October 3, 1994, it receives at least two types of contributions from its stores relating to these expenses.
Non-media expenses. For example, the Taxpayer's chart of account #98476 is for: "Advertising Contribution - Each unit will be charged 1.46% of sales to cover items such as menus, posters, and table tents that support system-wide marketing promotions or programs. This contribution will also cover crayons, kids placements, menu covers, menuettes, table tent holders and gift certificates.' (Emphasis added). As the listed expenses are for non-media purposes, they do not qualify for the media advertising exemption and are subject to taxation. Also, there is no mention that this account includes expenses for radio, television or other broadcast media charges.
Media Advertising. The Taxpayer's chart of account #98355 is shown to be for: "Media - Cost of media support to specific units. All units receiving television broadcast advertising will be charged an additional amount on their P & L to help support the media they are receiving for their market.' (Emphasis added). It is my understanding that these costs may not be applicable to all Virginia units.
Thus, according to the Taxpayer's own internal documentation, it requires units to contribute 1.46% of their sales ("Contribution #1') as well as to pay an additional amount ("Contribution #2') if the unit receives television broadcast advertising. However, the new information presented does not establish that the fees at issue represent the combination of Contribution #1 and Contribution #2. Nor does this information establish that radio broadcasting expenses and other media expenses were covered under the Contribution #1 criteria.
It would seem that the Taxpayer's records could show how these fees are set. For Store *****, the Taxpayer's information shows the monthly advertising contribution for April 1993 (the only sample month used for that store) to be *****. With reported sales of ***** and applying the 1.46% factor, the advertising contribution ***** would seem to be limited to *****. If the Taxpayer can establish that the difference of ***** is for Contribution #2 fees, such difference can be removed from the audit. If the Taxpayer can further establish that the ***** amount consists of some exempt charges, and can accurately determine the amount of such exempt charges, such charges can be removed from the sample.
Additional Documentation Required. Additional information is needed in order to revise the audit. The Taxpayer should furnish the department with copies of its Profit and Loss (P & L) statements issued to each Virginia location for the sample months used in the audit. The goal is to obtain information which shows the amounts that each Virginia unit was required to pay the Taxpayer and how these amounts were determined and for what purpose. The fees at issue may be further revised if the Taxpayer furnishes evidence of payment of sales tax on taxable purchases associated with such fees during the sample months. Any other information required by the department's audit staff to resolve this issue should be furnished.
Any and all new information to be presented needs to make proper comparisons and must be supported with sufficient documentation. The department will not make any adjustments until all calculations and documentation are verified to ensure that there are no discrepancies in the information.
Conclusion. An auditor from the department's ***** will contact the Taxpayer shortly to arrange for the receipt of the requested information. If found acceptable, the audit will be revised accordingly. However, if the Taxpayer cannot clearly establish that the fees at issue consist of taxable and exempt charges, then the tax assessed on such fees will be considered valid as assessed.
If you have any questions about the type, extent, and acceptability of the information to furnish, or the status of the audit revision, please contact *****, Audit Supervisor of the department's, ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/17295R
Rulings of the Tax Commissioner